Housing and Economic Recovery Act of 2008
The Housing and Economic Recovery Act of 2008 (the “Act”), which became law on July 30, 2008, includes significant changes to the Low-Income Housing Tax Credit (“LIHTC”) and the Historic Rehabilitation Tax Credit (“HRTC”). While these modifications are likely to impact developers, investors, and advocates of affordable housing, several changes are likely to significantly impact LIHTC and HRTC project investors (“Investors”).
Modifications to the Applicable Percentage Rate Determination
New buildings that are not federally subsidized and are placed in service after July 30, 2008 but before December 31, 2013 will qualify for a temporary applicable percentage rate increase under the Act of “not less than 9%”. Therefore, the risk associated with a floating applicable percentage rate has been removed for 9% deals.
Modifications to the “Federally Subsidized” Building Definition
Buildings receiving a federal subsidy are not eligible for the 9% LIHTC. The Act limits the definition of a federal subsidy by removing below-market federal loans as a source of federal subsidy. Properties placed in service after July 30, 2008 may benefit from a below-market federal loan and still qualify for the 9% LIHTC.
Repeal of the Bonding Requirement
The Act repeals the requirement that a bond be posted in the case of a change in ownership in order to avoid recapture of any applicable LIHTC. If the taxpayer reasonably believes that the LIHTC project will continue to be operated for the duration of the compliance period as a LIHTC project then the taxpayer may dispose of the property without worry of recapture. The removal of this requirement applies to all properties disposed of after July 30, 2008. In addition, taxpayers who have disposed of LIHTC projects prior to July 30, 2008 and are currently subject to the bonding requirement may elect to benefit from the repeal of the bond requirement by submitting a letter to the IRS.
Reducing the Impact of the Alternative Minimum Tax
A taxpayer subject to the alternative minimum tax (the “AMT”) may use LIHTCs and HRTCs to offset AMT liability. This provision applies to those properties placed in service after December 31, 2007. As a result, Investors who are, or may be, subject to the AMT may benefit from investment in LIHTC and HRTC projects. The provision eliminates potential risk to those Investors who may become AMT investors at some point during the tax credit compliance period.
Temporary Increase in the Housing Credit Volume Limits
The volume cap for LIHTCs that each state housing agency may allocate is temporarily increased by 10% for 2008 and 2009. This increase, along with other modifications provided for under the Act, should increase the supply of LIHTCs in each state.
Expanding Eligible High Cost Areas
Projects eligible for LIHTCs located in areas designated as high cost areas by state housing agencies are eligible for a 30% increase in eligible basis to encourage the development of these projects. The Act expands the definition of high cost areas to now include those buildings designated by a state housing credit agency as requiring this increase in basis in order for the project to be financially feasible. Given ongoing restraints in the credit market, LIHTC eligible projects may benefit from this provision.
The market for LIHTCs and HRTCs has not been insulated from the volatility in the credit markets. Several of the provisions of the Act are designed to mitigate these effects and promote continued growth in affordable housing through the use of tax credits. These changes may act to both stabilize some common elements of risk in LIHTC and HRTC investments and promote the availability of these credits on a going forward basis. It remains unclear what impact such changes will have on the yields being demanded by Investors in tax credit projects. If you have questions regarding how the Act and its tax credit related provisions may impact your interest in investing in LIHTC and HRTC projects, please contact Peter Duffley, Jonathan Jenkins or another member of our Community Development and Affordable Housing Team.
Modifications to the Applicable Percentage Rate Determination
New buildings that are not federally subsidized and are placed in service after July 30, 2008 but before December 31, 2013 will qualify for a temporary applicable percentage rate increase under the Act of “not less than 9%”. Therefore, the risk associated with a floating applicable percentage rate has been removed for 9% deals.
Modifications to the “Federally Subsidized” Building Definition
Buildings receiving a federal subsidy are not eligible for the 9% LIHTC. The Act limits the definition of a federal subsidy by removing below-market federal loans as a source of federal subsidy. Properties placed in service after July 30, 2008 may benefit from a below-market federal loan and still qualify for the 9% LIHTC.
Repeal of the Bonding Requirement
The Act repeals the requirement that a bond be posted in the case of a change in ownership in order to avoid recapture of any applicable LIHTC. If the taxpayer reasonably believes that the LIHTC project will continue to be operated for the duration of the compliance period as a LIHTC project then the taxpayer may dispose of the property without worry of recapture. The removal of this requirement applies to all properties disposed of after July 30, 2008. In addition, taxpayers who have disposed of LIHTC projects prior to July 30, 2008 and are currently subject to the bonding requirement may elect to benefit from the repeal of the bond requirement by submitting a letter to the IRS.
Reducing the Impact of the Alternative Minimum Tax
A taxpayer subject to the alternative minimum tax (the “AMT”) may use LIHTCs and HRTCs to offset AMT liability. This provision applies to those properties placed in service after December 31, 2007. As a result, Investors who are, or may be, subject to the AMT may benefit from investment in LIHTC and HRTC projects. The provision eliminates potential risk to those Investors who may become AMT investors at some point during the tax credit compliance period.
Temporary Increase in the Housing Credit Volume Limits
The volume cap for LIHTCs that each state housing agency may allocate is temporarily increased by 10% for 2008 and 2009. This increase, along with other modifications provided for under the Act, should increase the supply of LIHTCs in each state.
Expanding Eligible High Cost Areas
Projects eligible for LIHTCs located in areas designated as high cost areas by state housing agencies are eligible for a 30% increase in eligible basis to encourage the development of these projects. The Act expands the definition of high cost areas to now include those buildings designated by a state housing credit agency as requiring this increase in basis in order for the project to be financially feasible. Given ongoing restraints in the credit market, LIHTC eligible projects may benefit from this provision.
The market for LIHTCs and HRTCs has not been insulated from the volatility in the credit markets. Several of the provisions of the Act are designed to mitigate these effects and promote continued growth in affordable housing through the use of tax credits. These changes may act to both stabilize some common elements of risk in LIHTC and HRTC investments and promote the availability of these credits on a going forward basis. It remains unclear what impact such changes will have on the yields being demanded by Investors in tax credit projects. If you have questions regarding how the Act and its tax credit related provisions may impact your interest in investing in LIHTC and HRTC projects, please contact Peter Duffley, Jonathan Jenkins or another member of our Community Development and Affordable Housing Team.
posted by Jonathan Jenkins at 5:30 PM
0 Comments:
Post a Comment
<< Home